International Investment Analysis of Tesco - Assignment Example

?Investment Report Table of Contents Table of Contents 2 Present Situation of TESCO 3 Macroeconomic situation 4 Porter’s Five Forces Model 5 Competetive strategies 7 Analysis of Company Operating Exposure 8 Management of Operating Exposure 8 Conclusion 9 References 10 Introduction: History TESCO is one of leading supermarket retailer in United Kingdom (UK), and the fourth largest retailer in the world after Walmart, Carrefour and Home Depot. It is also one of the largest online grocery retailers in UK (Dinkhoff, 2009). Tesco was founded by Jack Cohen in the year 1919 in London, UK. Initially, Tesco specialized in the food retailing but later it diversified into non food segments like clothing, electronic appliances, banking, insurance and telecommunications (Aker and McLoughlin, 2010). Present Situation of TESCO The company has a worldwide presence in China, India, Hungary, Slovakia, Czech Republic, Poland, Ireland, North America and many other countries. The company employs 300,000 people and operates 3,000 stores worldwide (TESCO Plc, 2013b). The company operates 200 stores in UK itself and offers a varied range of food items (Gargeya, V.B. et al., 2012). It is the leading brand of food retailing in UK followed by Everyday Value. Tesco has always believed that the strategy of the company needs to be revised as per the changing taste and preference of consumers. The company earns 25 percent of its revenue from countries outside UK (Martin and Thompson, 2010). The underlying objective of the company is to earn higher amount of profits but their strategies are usually customer oriented. Tesco believes in improving the customer service by responding to the customer needs and wants. TESCO believes in innovation and expansion in the UK grocery market and convenience stores electronics, clothing, beauty health and wellness and retail services like personal finance and telecom products. These strategies are followed by TESCO to strengthen its market position in UK and other countries. The stores are usually renovated from time to time, in order to give customers a warmer and refreshing feel in the stores. TESCO products are usually low priced and of better quality. The company believes in undertaking environmental and social responsibilities. It publishes its corporate social responsibility charter every year. Macroeconomic situation Prior to recession, TESCO’s sales were ?42 billion in the year 2006, which was an increase in profit by 13.2 percent from the financial year 2010-2011. The market share of TESCO was 31.4 percent, which was even more than the market share of ASDA Walmart that was 16.7 percent (Henry, 2008). Figure 1: Market share of UK supermarkets in the year 2006 (Source: Henry, 2008) The company was reaping profits and was making considerable amount of sales before recession. This was mainly due to the marketing team of TESCO which monitored the trend of external environment and provided innovative products and solutions to customers. The brand became so popular among the residents of UK that customers had created a brand loyalty towards the company (Haerifar, 2011). From the above graph, we can observe that the dominant supermarket was TESCO in the year 2006 followed by ASDA Walmart and Sainsbury. After recession had penetrated into the markets of USA and UK in the year 2008, the company TESCO witnessed a slow growth (English, 2009). Majority of its revenue was coming from the overseas markets and it was facing a stiff competition from the supermarkets of UK like ASDA Walmart, Morrisons and Aldi. Although, TESCO claimed that there was an increase in sales by 11.7 percent in the fourth quarter of the year 2008 (Thompson, 2008) economist believed that TESCO was not able to reach its sales target. To add to the woes of TESCO, the government had also increased the Value Added Tax (VAT) rate and excise duty (Peston, 2012). The net sales of TESCO was ?51.77 billion in the year 2008 compared to ?59.46 billion in the year 2009 (TESCO Plc, 2013a). TESCO is slowly recovering from the recession and making considerable gains. Although, the main focus of the company was to devise certain strategies which could help in retaining the existing customers and attract potential customers. The Unique selling Proposition (USP) of TESCO was the food segment but during recession customers started buying food products from Sainsbury, Waitrose and Marks and Spencers. TESCO revamped its marketing strategy and redesigned its official website. The online store of TESCO generated huge amounts of revenues for the company. In the year 2011, the company generated sales of ?67.6 billion (TESCO Plc, 2013a). Porter’s Five Forces Model The five forces framework model developed by Michael Porter in the year 1980 is an analytical tool which determines the competitive intensity and attractiveness of an industry by the interaction of five competitive forces. The five forces are 1) Threat of new entrants 2) Bargaining power of buyers 3) Bargaining power of suppliers 4) Threat of substitutes 5) Intensity of rivalry among competitors. By examining the competitive forces of the industry, one can assess the capability and profit potential of the industry (Henry, 2008). Threat of new entrants: The new entrants are usually attracted by the profitable gains of a particular sector. During recession, the UK retail industry did not witness any new entrants since this sector was not gaining any profits. The current economy in UK is recovering from the economic slowdown which means that the purchasing power of the common people will increase and they would purchase more products. During recession, the threat from new entrants was low. Bargaining power of buyers: The product offerings of the UK supermarkets are almost same and customers can make purchases between undifferentiated products and from competitor’s product. In the current situation, the bargaining power of buyers is high which is not beneficial for the company (Henry, 2008). Bargaining power of suppliers: The suppliers in UK are attracted by the profitable gains earned by the supermarkets of UK. They prefer supplying products to supermarkets which sell products which are of high demand to the customers. TESCO sells their own product range and products of other companies. For example, Kellogg and Heinz had made a niche market for themselves and made profits during recession. The mission of TESCO was to sell its own label and sell products of those companies which made profitable gains. The customers of TESCO wanted to see branded products in the shelves of the supermarket. TESCO hires out its shelf space to manufacturers who give sufficient amount of profits. There are quite a number of suppliers for branded products as these products never fail to yield profit even amidst recession. The supermarkets also sell farm produce like milk and poultry products and the suppliers for these products are quite less, which also signifies that their bargaining power is high. The bargaining power of supplier is influenced by the extent to which TESCO is able to purchase a bulk amount of their output (Henry, 2008). Threat of Substitutes: As mentioned before, supermarkets in UK offer similar products to the customers. They are already established and successful brands offering a varied range of products. The retail outlets of UK do not generate even 45 percent of the revenue earned by the supermarkets. This industry has a low threat from substitutes (Henry, 2008). Intensity of Rivalry: The supermarkets of UK face intense rivalry among themselves. TESCO, Walmart, Sainsbury and Morrison are the leading supermarkets of UK. Together they have a combined market share of 75 percent and are the most popular brands in UK (Henry, 2008). Competetive strategies TESCO is known for devising new strategies according to the changing tastes and preferences of the customers. The strategies devised by the company helps them in gaining competitive advantage over their competitors. The strategies are 1) The Royalty Clubcard 2) Brand Loyalty 3) The quarterly mailing 4) Vouchers and coupons Royalty Clubcard: TESCO introduced its Loyalty Clubcard in the year 1995. It became one of the most popular marketing concepts of TESCO and helped the company to increase its market share. The effect of Clubcard was very essential to TESCO’s accelerating business success. According to the market researcher Taylor Nelson, customers spent 28 percent of their time at the TESCO store compared to a 16 percent at Sainsbury (Humby, Phillips and Hunt, 2008). Loyalty Contract: The loyalty club contract offers customer to earn points when they shop at TESCO. The accumulated points help the customers to win prizes and rewards. This marketing strategy has facilitated the communication between the customers and the management of TESCO. Customer mailing: TESCO mails their customer four times a year and informs about the revised customer loyalty program. The company mailed around 65000 different content wise personalized letters to 8.5 million customers. This method seemed to be very effective, as customer base of TESCO started increasing again. Voucher and Coupons: TESCO offered discount coupons and vouchers which could be redeemed within a stipulated time frame. After this marketing concept was introduced, the frequency of customer visits to the store increased. The discount coupons and vouchers are very popular among the common people and there were less than 300 complaints about the loyalty program scheme. TESCO also takes initiatives for environment protection and the betterment of the society. It has devised a scheme in which the customers will donate their loyalty points to the company. These loyalty points are enchashed and then used for planting trees and taking environment protection measures (Humby, Phillips and Hunt, 2008). Analysis of Company Operating Exposure Operating exposure is the degree of risk that a company is exposed to when there is some type of change in varying currency values that are relevant to the operation of the company. Unexpected changes in the value of euro will affect the value of TESCO and its branches overseas. The company also operates in the banking and telecom sector, so it can face certain credit and financial risks due to the fluctuations in interest and exchange rates and default of counterparties of an agreement in a financial transaction. To limit the loss of the company from rising interest rates, the company can purchase interest rate swaps, caps and floors to obtain a desired mix of fixed and floating rate debt. TESCO also faces the effect of volatility due to the changes in exchange rate of different countries hence, the company can purchase or sale the foreign currencies and currency swaps (TESCO Plc, 2013a). Management of Operating Exposure Operating exposure management involves the management of a company’s marketing and production activities, so that a company is able to change these activities to utilize the favourable exchange rate. The favourable exchange rate reduces the negative impact of the exchange rate movement. At an operational level, the company can undertake the following activities to manage the operating exposure of the company. Some of the activities which can help in undertaking the operating activities of the company are 1) Matching currency cash flow 2) Risk sharing agreements 3) Parallel loans Matching currency: The main aim of the company is to match its asset and liabilities. The company can borrow or issue debt securities in foreign currencies which are doing very well, so that the export receivables are used to pay the interest and principal. This will help the company to raise finances in foreign currency. Risk sharing agreements: Risk sharing agreement focuses on the contractual agreement between the importer and exporter to split the currency between them. As per the agreement, the profits and gains are shared by both the parties which include buyer and seller. For example, when the euro currency appreciates beyond a certain point then the company situated in UK exports the items to a company situated in Japan at a rate of ?20, making a loss provision for TESCO, UK. Similarly, when the euro currency depreciates then the company situated in UK is reaping profits. Parallel loans: Two companies in different countries borrow offsetting amounts from one another, in each other's currency. For example let us assume TESCO, UK imports certain products from TESCO, Japan or some other company. The company which exports products to TESCO, UK gives a loan amount of ?15000. The day this loan was given, the spot rate was ?42/Euro. The Japanese exporter gives a loan amount of ?15000 and in return TESCO, UK gives a loan amount of ? 630000 later (Rajib, 2006). Conclusion To maintain its position as the leading supermarket of UK, TESCO needs to devise its marketing strategy as per the changes in market trends and changing taste and preferences of customers. TESCO needs to improvise the quality of their products and maintain a smooth relationship with their suppliers and customers. References Aker, D.A., and McLoughlin, D., 2010. Strategic market management: Global perspectives. New Jersey: John Wiley & Sons. Dinkhoff, M., 2009. Business valuation of Tesco. Berlin: GRIN Verlag. English, S., 2009. Tesco defies recession with fastest sales growth in years. London evening standard, [online] 03 December. Available at: < http://www.independent.co.uk/news/business/analysis-and-features/recession-slows-the-tesco-juggernaut-1048858.html> [Accessed 11 March 2013]. Gargeya, V.B. et al., 2012. Customer relationship management: A global perspective. Farnham: Gower Publishing. Haerifar, P., 2011. Performance management in Tesco. Berlin: GRIN Verlag. Henry, A., 2008. Understanding strategic management. Oxford: Oxford University Press. Humby, C., Phillips, T. and Hunt, T., 2008. Scoring points: How Tesco continues to win customer loyalty. 2nd ed. London: Kogan Page. Martin, F., and Thompson, J.L., 2010. Strategic management: Awareness & change. 6th ed. London: Cengage Learning. Peston, R., 2012. Is this the end of Tesco's UK growth? BBC news, [online] 12 January. Available at: < http://www.bbc.co.uk/news/business-16527080> [Accessed 11 March 2013]. Rajib, P., 2006. Operating exposure management: At operational level. [pdf] Available at: < http://nptel.iitm.ac.in/courses/110105031/pr_pdf/Module27.pdf > [Accessed 12 March 2013]. TESCO Plc, 2013a. Investors. [online] Available at: < http://www.tescoplc.com/index.asp?pageid=166> [Accessed 11 March 2013]. TESCO Plc, 2013b. About us. [online] Available at: < http://www.tescoplc.com/index.asp?pageid=8&panel=1#panel1> [Accessed 11 March 2013]. Thompson, J., 2008. Recession slows the Tesco juggernaut. The Independant, [online] 03 December. Available at: < http://www.independent.co.uk/news/business/analysis-and-features/recession-slows-the-tesco-juggernaut-1048858.html> [Accessed 11 March 2013]. Read More